Issuing real estate tokens on a distributed ledger technology (DLT)-based platform and creating a marketplace for issuers (property owners), investors, and other stakeholders may be the solution to taking the real estate market to the next level. So What is real estate tokenization? Follow GIG’s article.
What is real estate tokenization?
Real estate tokenization or tokenization of real estate broadly refers to the process of representing interests in real estate assets on a blockchain or distributed ledger in the form of a token, the ownership of which can be transferred via the blockchain’s protocol. Tokenization is part of a more significant trend in fintech over the last decade towards democratization of assets and disintermediation of traditional gatekeepers. Over the past few years, the evolution of the cryptocurrency markets has further accelerated this movement, allowing broader access to investments and greater control for investors. At its core, real estate tokenization makes it easier to buy and sell real estate interests, adding liquidity to the market while increasing transparency and security and reducing costs and risk compared to traditional private real estate securities.
What are the benefits of real estate tokenization?
Tokenization can radically transform the global real estate market. It offers both issuers and investors a wealth of substantial advantages over the existing investment options. It opens up opportunities for a more significant number of investors to enter the market. Below we’ll consider some of the most significant gains that tokenization is bringing to real estate.
Liquidity is seen as one of the chief advantages of tokenization, as it has the flexibility to achieve additional value that illiquid assets lack. Besides, fractional ownership can contribute enormously to increased revenue in the commercial real estate segment. This can result in billions or even trillions of dollars of equity investment.
A security token doesn’t need to be sold as a whole unit. As a result of fractionalization, the code that underpins the token makes it possible to divide it, thus allowing the issuer or holder to sell these fractional tokens at a lower price. Consequently, smaller investors will have a chance to take part in the investment market. Meanwhile, wealthier investors will be given more opportunities for diversification.
Standardization of transactions via smart contracts
The tokenization process heavily relies on blockchain technology. This, in turn, allows for both the purchase and sale of real estate security tokens via standardized smart contracts. The essential advantage of smart contracts is that they don’t have to be individually negotiated. Their terms can be implemented automatically, which considerably reduces transaction costs and the time needed to carry out the procedure.
Blockchain is capable of recording every transaction that takes place on it. Whenever a single token undergoes a transaction, all the participants become aware of it. Therefore, investors can look at the token’s history, pricing, and other transaction details at any time.
Given that blockchain is a distributed ledger, no person or organization can control it and impose its own policies. Moreover, distributed ledger technology (DLT) uses advanced cryptography techniques that provide users with heightened security. Each user has their own private key that gives them access to their blockchain assets. This key is generally represented as a line of random characters (both letters and numbers), which makes it extremely difficult, or even impossible, for outsiders to guess it.
The most notable feature of blockchain is that after a transaction has been recorded and confirmed, it doesn’t allow anyone to change and alter the transaction details. This proves extremely useful when investors want to make sure that no one has falsified the information about the transaction.
What are the challenges of real estate tokenization?
While tokenization of real estate offers many benefits, effectively realizing those benefits presents several challenges that will need to be addressed to realize the space’s true potential. Regulatory challenges present the most significant obstacle, given that even issuers that want to create liquidity in secondary exchanges remain subject to KYC and AML requirements, other considerations ranging from licensing and reporting obligations. The still-nascent adoption of cryptocurrency and DeFi means that it could take time for the widespread adoption that facilitates seamless borrowing and exchanges. Issuers will also need to tread carefully to ensure that the tokenized structure fits within the giant capital stack, where mortgage lenders and other counterparties less familiar with tokenization could be reluctant to entertain new structures.
The future for real estate tokenization
Real estate tokenization is becoming increasingly popular and is demonstrating a massive potential for further growth. Before its introduction, only a small number of both accredited and institutional investors had an opportunity to participate in investment projects. The situation has changed, and the real estate market has become more developed thanks to blockchain-enabled tokenization.
Tokenization is bringing about greater liquidity and transparency. As technology advances, it’s abundantly clear that real estate, which was resistant to change for so long, will quickly catch up with other industries.
In the months and years ahead, more and more tech startups and companies will appear on the horizon to offer their unique solutions for real estate tokenization, in their turn helping the whole real estate industry to make great strides.
Of course, there’ll be some challenges and pitfalls along the way. But the crucial point is that right now, barriers to a wider tokenization adoption are being removed, knowledge and experience are being enriched, and customized real estate tokenization platforms and other solutions are improving. So there’s every reason to be optimistic about what the future holds.
The real estate industry has yet to realize the remarkable potential of blockchain-enabled tokenization for tackling the existing market challenges. But even now, it’s evident that tokenization has already provided the industry with substantial benefits – most obviously, in terms of improved liquidity, transparency, security, inclusiveness, and management. Apart from real estate, tokenization represents a go-to tool for many other industries that are in need of change and disruption. It will set them on a new path, enabling them to achieve much-desired and long-awaited improvements and efficiencies in their workflows.
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